Do you have a Loan with a lender which was signed before
6th April 2007 and which was for £25,000 or less
(and which was a private loan ie not for business purposes)?

If so it may be wholly unenforceable against you !!

80% of such agreements are unenforceable !

The topic of finance mis-selling by lenders (including the high
street banks) is certainly a very hot topic on consumer websites
and consumer media programmes.

It is estimated that there are some 50 million loan agreements
in existence which are unenforceable either because there are basic
defects in the documentation or because the way in which the
PPI/PPP/ASU insurance policies were sold impacted on those
agreements making them unenforceable.

There are, essentially, two sorts of unenforceability (at least
prior to April 2007 when the Consumer Credit Act 2006 took effect)
and these can be conveniently referred to as
"irredeemably" unenforceable agreements and
"discretionally" unenforceable agreements.

The Technical Stuff

Section 65(1) of the Consumer Credit Act 1974, states that
regulated agreements are enforceable only by order of the Court if
they are improperly executed. By sections 61(1)(a) and 127(3) if
they are improperly executed they are wholly unenforceable if the
agreement does not contain all the terms prescribed by law and in
the prescribed form. A breach of Section 65 creates
"discretionally" unenforceable agreements and a breach of
sections 61 and 127 create "irredeemably" unenforceable
agreements. In the latter case the Court has no discretion
whatsoever other than to declare the agreement unenforceable. The
authority for this statement is both the Consumer Credit Act 1974
itself and the case of Wilson v First Counties both in the Court of
Appeal ([2001] EWCACIV633) and in the House of Lords ([2003]
UKHL40).

But this is for your Lawyers to get to grips with !

"Traffic Lights"

It may be convenient to consider such cases using a
"traffic lights" approach. Some case will be
"reds" others "ambers" and some
"greens".

A "red" is a loan agreement which is
"irredeemably unenforceable" (ie the Court has no
jurisdiction whatsoever to enforce such an agreement,
even if they really want to or feel they ought to). This
occurs where the breaches are breaches of what is described in the
Act as "Prescribed Terms".

An "Amber" is a loan agreement which contains breaches
of the 1974 Act but the Court has a discretion as to whether to
enforce or not (and on appropriate terms). This occurs where the
breaches of a type known as "Other Terms".

A "green" is a loan agreement which contains no
breaches.

De Minimis (ie. tiny amounts)

It may come as something of a surprise to discover that even if
a Prescribed Term is wrong by even a pound (or less) that the Court
still may not enforce the Agreement. This point is made in the
Wilson v First County case.

Wilson v First County

The Wilson case is interesting in that it involved a loan of
£5,000 from moneylenders who charged Mrs Wilson a fee of
£250 for putting the loan together. Mrs Wilson did not have
the money and therefore it was added to the loan. By virtue of
regulation 4 of the Consumer Credit (Total Charge for Credit)
Regulations 1980, the £250 should not have been added to the
amount of credit (and therefore should not have had interest
charged on it) and by so doing the agreement was rendered
irredeemably unenforceable. That meant she got her car back, did
not have to make any further monthly payments and no longer had to
pay back the remainder of the £5000 borrowed !

Human Rights

The case went to the House of Lords on a Declaration of
Incompatibility by the Court of Appeal That Court felt that the
effect of such a Judgment was that Mrs Wilson could get her car
back (securities taken on irredeemable loan agreements must be
returned) and she would have to pay no further sums to the money
lenders. This seemed too much of a windfall to the Court of Appeal.
In common parlance: a "double whammy"! Interestingly
neither Mrs Wilson nor First Counties appeared in the Lords.

The House of Lords, in essence, said that the purpose of the Act
was to protect the unsophisticated borrower against the
sophisticated lender and all the lender had to do to make his
agreement enforceable was to comply with the requirements of the
Act. If he failed to comply then it was entirely right that he
suffered in the way provided by the Act. The House of Lords
effectively said that there was no human rights point at issue.

What is the trigger for a claim?

Most claims come via Case Management Companies to solicitors
(but there is no reason why a client should not go to a solicitor
directly) because the prospective client believes he may have been
mis-sold a PP/PPI/ASU policy. Oddly, even if this is the case, this
is not, of itself, likely to be the trigger for a claim through the
Courts. It may be that the best advice to someone who has had such
a policy sold to them is to go through the Financial Ombudsman
Service . The reason for this is that "if it looks like a duck
and quacks like a duck" the Financial Ombudsman will recognise
that it is a duck ie. he will know a mis-sold policy when he sees
one. The same does not necessarily apply in the Court. Firstly,
there has, obviously to be a "cause of action" (that is
"the legal hook" on which the claim is based). This may
be "misrepresentation" or "negligence" etc but
there are many cases when the client was not even aware that such
an insurance policy had been sold to him and it is very difficult,
in those circumstances, to allege misrepresentation or negligence
or the like. The procedure for a claim through the Financial
Ombudsman is relatively straightforward and in cases where such a
claim is possible, this would seem to be the preferable route.
There are however many cases where the Financial Ombudsman service
is not able to help. For example, if the lender, at the time of the
loan, was not regulated by the Financial Ombudsman then the
Ombudsman has no jurisdiction. Since 2005 the Ombudsman scheme
became compulsory for all Lenders.

From the perspective of the Loan Agreement, however, the
Court's jurisdiction is likely to be invoked because the lender
who has added the premium for this policy to the amount of loan and
treated this premium as "credit" will risk having made
the loan agreement irredeemably unenforceable and therefore it has
become a "legal" dispute as opposed to merely a
"mis-selling" issue.

An example situation

Take a loan of say £10,000. It is quite likely that the
lender will have sold to the borrower a PPI/PPP/ASU insurance
policy and the premium can easily be as much as £4,000 or
more. The premium is, invariably, a "single premium",
paid upfront and almost invariably added to the amount of the loan.
It is difficult to justify such insurance policies in any
circumstance whatsoever and the only reason that they are sold is
because the commissions on such policies are always surprisingly
high (and in some cases are as much as 80% of the premium!). There
may be circumstances in which a PPP/PPI/ASU policy may be of
benefit to the customer but, almost certainly, that customer ought
to have bought a "monthly paid" policy. On the example
used above the premium for such a policy would be likely to be in
the order of £60 per annum. There are many further downsides
to the single premium policy, for example, they are frequently sold
to people who could never have made any claim on those policies
(how can you have an unemployment insurance policy for someone who
is self-employed?). Similarly those polices frequently will not pay
out if at the time that they came into existence the insured was
say under 18, not working, had an illness or was over 65. Yet huge
numbers of such policies have been sold by lenders to such persons.
It is hard to avoid the thought that these single premium policies
are almost fraudulent and are on an industrial scale. (The
"Breakfast" program on BBC1 said recently that of all the
profits made by Banks that 10% came from the sale of these
policies).

Citizen Advice Bureau

The Citizen Advice Bureau has found that PPI is overpriced,
difficult to claim on and often sold to the wrong people. They say
that it adds between 13% and 56% to the cost of the loan and that
only 6% of people ever claim on a PPI and 85% of those claims are
then rejected (ie. less than 1% actually successfully claim). A
large number of lenders have already been fined large sums of money
by the Financial Ombudsman (eg a division of HSBC was fined
£1 million and the Alliance & Leicester more than
£7 million in 2008). It seems likely that the sale of further
such policies will be outlawed by the FSA in due course.

The 2006 Act

For completeness it should be remembered that the 2006 Act which
affects loan agreements made after April 2007 does away with
"irredeemably" unenforceable agreements and now all
agreement are only "discretionary" unenforceable if there
are breaches. ie we now only have "Ambers" and
"Greens" with effect from 6th April 2007.

"Upside" and "Downside" to a claim

The "upside" to a successful claim for
unenforceability is that no more money is payable to the Lender.
The "downside" is that although the loan is
"unenforceable" through the Courts it remains a legal and
binding debt. So you cannot be sued but the Lender can pinch any
money standing to your credit in any account with that Lender (or
even add it to any agreed overdraft). So if you have an
unenforceable loan make sure you do not have any money with that
same Lender (or even an overdraft facility with them).

Also at present there seems nothing to stop the Lender
registering your non-payment of the unenforceable debt with the
Credit Referencing Agencies (although this point is the subject of
Court cases).

Conclusion

So, if a bad credit reference is not too important to you and
you have a loan agreement under the Consumer Credit Act 1974 then
getting specialist legal advice may be very beneficial to you,
particularly as your Lawyers will probably agree to take your case
on a no-win, no-fee basis (ie. it costs you nothing win or lose).
They may have to obtain a report on your agreement to find out the
"ins and outs" of the agreement and that does costs a bit
and you may be asked to pay (or contribute towards) it.

PS.

Similar law applies to credit cards too !!

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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On 06 August 2013 the Department for Business, Innovation and Skills (BIS) published the Draft Consumer Protection from Unfair Trading (Amendment) Regulations 2013 (the "Draft Regulations") for scrutiny.

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